If you're buying a house with your partner, you may or may not be engaged or you may never plan on getting married. You may be buying a house with a family member or friend. Whatever you're situation you will be asked to take out Mortgage Protection to secure the loan in the event of either of you dying.
You have applied for your mortgage on a joint basis so you may think that you should apply for the mortgage protection on a joint basis but this is not the case. When you're unmarried, any inheritance you receive from your partner will be subject to inheritance tax. So if either of you die, the mortgage protection payout is seen as inheritance in the eyes of the Revenue even if it is used to pay off the loan.
Here's an example:
John & Mary are buying a house together for €380,000, the loan is for €200,000. They take out a Joint or Dual Life Mortgage Protection policy together. If John dies, the mortgage is paid off but Mary is still seen to have inherited 50% of the value of the house, in this case, €190,000. Mary can use her threshold of €16,250 and must then pay 33% inheritance tax on the balance: €57,337.
By taking out two Single Life Mortgage Protection policies on a 'Life of Another' basis and paying each others premiums, they could reduce this tax bill. In this situation, if John dies the mortgage balance is paid off and Mary is seen to have inherited 50% of the mortgage free value of the house, which in this case is €90,000. This is because Mary has paid the policy herself so there is no inheritance tax due on the mortgage balance. Mary can use her threshold of €16,250 and must then pay 33% inheritance tax on the balance: €24,337.
How can John and Mary reduce this tax bill further? They can take out extra life cover for the amount of the inheritance tax bill. This would be the most complete way to ensure the surviving spouse is covered.
John and Mary could also avoid the inheritance tax if they met the criteria for the Dwelling House Exemption. This indicates that you will not have to pay inheritance tax on a house if:
1. The house was the only or main home of the person who died (this condition does not apply if you are a dependent relative).
2. You lived in the house as your main home for the three years before the person’s death.
3. You do not own, have an interest or a share in any other house, including one you acquired as part of the same inheritance.
4. The house is your main home for six years after you receive the inheritance. This does not apply if you are over 65.
So if you are on the fence about getting married, it may be a good idea to avoid all of the above, plus you will pay less tax on your earnings if jointly assessed!! :) (no pressure)
If you're looking for the cheapest quotes for Mortgage Protection and proper financial advice in this area, please contact us now on 021-4858400.